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Firms and competition · 11 of 11

Is competition policy worth it?

Weigh the case each way on breaking up a large firm

Key terms
Competition policy
Competition policy is the body of law that promotes competition between firms, including the power to block certain mergers and, in some cases, to break up large firms.
Price cap regulation
Price cap regulation is where a regulator sets the price that a firm with market power can charge over the next few years.

Economists object that a monopoly supplies too little

Most people criticise monopolies for charging too high a price. What economists object to is that they do not supply enough output to be allocatively efficient. At its profit-maximising output a monopoly's price is always above marginal cost, so buyers value one more unit at more than it would cost to make, and it goes unmade. Consumers get a lower quantity at a higher price than a competitive market would give them.

A monopoly's output and priceVertical axis: Price and cost. Horizontal axis: Quantity. D = AR: a downward-sloping line. MR: a downward-sloping line. MC: an upward-sloping line. MR meets MC, at quantity Qm. A point at price Pm. D = AR meets MC, at price P* and quantity Q*. Shaded area DWL: deadweight loss.DWLQmPmQ*P*D = ARMRMC
The monopoly makes Qm, where MR = MC, and charges Pm, read off the demand curve, well above marginal cost. A competitive market would produce Q*, where price equals marginal cost. The shaded area DWL, the amount by which buyers value the units between Qm and Q* above what they would cost to make, is the deadweight loss: those units are never made.